Tax Shelter

A Tax Shelter is a way to protect income or earnings from federal or state taxes.  For example, a plan available to employees that allows them to avoid paying taxes today and promotes saving for retirement is a tax shelter.  A typical tax shelter that an individual can take advantage of is a Roth IRA.

 While an IRA allows the individual to avoid paying future taxes on interest earned, it does serve an economic purpose - retirement income.  Roth IRAs and Traditional IRAs, SIMPLE IRAs, 401(k) plans, and 403(b) plans are all good examples of tax shelters. Corporate tax shelters include tax deferral or reduction tax laws that are used to promote investment such as accelerated depreciation.

Tax shelters carry a negative undertone due to abuses that can take place.  For example, transactions that have no economic purpose other than reducing taxes are considered abusive tax shelters and are to be avoided.

Other forms of this term include - tax shelter, tax sheltering